Working Paper: NBER ID: w10555
Authors: Assaf Razin; Yona Rubinstein
Abstract: It has been a remarkably difficult empirical task to identify clear-cut real effects of exchange-rate regimes on the open economy. Similarly, no definitive view emerges as to the aggregate effects of capital account liberalizations. The main hypothesis of the paper is that a direct and an indirect effect of balance-of-payments policies, geared toward exchange rate regimes and capital account openness, exert a confounding overall influence on output growth, in the presence of sudden-stop crises. A direct channel works through the trade and financial sectors, akin to the optimal currency area arguments. An indirect channel works through the probability of a sudden-stop crisis. The empirical analysis disentagles these conflicting effects and demonstrates that: (i) the balance-of-payments policies significantly affect the probability of crises, and the crisis probability, in turn, negatively affects output growth; (ii) controlling for the crisis probability in the growth equation, the direct effect of balance-of-payments policies is large. Domestic price crises (high inflation above a 20 percent threshold) affect growth only indirectly; through their positive effecton the probability of sudden-stop crises.
Keywords: No keywords provided
JEL Codes: F0; F4
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| balance-of-payments policies (F32) | probability of crises (G01) |
| probability of crises (G01) | output growth (O40) |
| balance-of-payments policies (F32) | output growth (O40) |
| high inflation rates (E31) | probability of sudden-stop crises (G01) |
| switching from float to peg (F31) | probability of crises (G01) |
| capital controls (F38) | probability of crises (G01) |